Author Topic: Proposal - Significant Enhancement to Market Engine  (Read 24879 times)

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Offline bytemaster

I have a question (that I considered too early to ask, in my hopes this idea goes on the way side).

Buyers will pay what price exactly with this collateralization ordering of the shorts?

How will asks be ordered in this new world view (assuming same/less/more price) than those short orders?

The asks are unchanged from the current system.  They get what they asked for.
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Offline tonyk

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Maybe the entire currency market should act as a single giant market maker bot.

Yes, if this could be done without transferring risk to people that didn't sign up for it we would do it.

Do not let me search for the whole proposal - in short willing BTSX holders deposit funds in the bot account and the bot just sells/buys at feed price.... Willing bot sponsors will 'always' be available as they are BTSX bulls, and in reasonably long run, the bot will sell at ever decreasing bitUSD price (price in BTSX terms, that is). Any profits are dispersed per depositor's request and proportional to the time the BTSX were kept in the bots account.
« Last Edit: September 18, 2014, 12:59:39 am by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline tonyk

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I have a question (that I considered too early to ask, in my hopes this idea goes on the way side).

Buyers will pay what price exactly with this collateralization ordering of the shorts?

How will asks be ordered in this new world view (assuming same/less/more price) than those short orders?
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline bytemaster

Maybe the entire currency market should act as a single giant market maker bot.

Yes, if this could be done without transferring risk to people that didn't sign up for it we would do it. 
For the latest updates checkout my blog: http://bytemaster.bitshares.org
Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline bytemaster

You can think of increasing the collateral requirement like decreasing the leverage and thus the ROI.   

There are two ways to adjust short supply:  provide constant leverage (2:1) and variable cost (interest rate)  or provide variable leverage and constant cost (0 interest rate).   There comes a point where the leverage gained by going short is not worth the risk.

If you want the interest rate model to work you require two prediction markets working at the same time.  This approach is potentially viable because any attempt to "short BitUSD out of existence" would end up in sending the interest rate prediction market through the roof.

The demand for BitUSD is highly correlated to how well the peg is holding up.  If it does not hold up well and has a wide spread then the demand will be low.  If it holds up very well then the demand will be very high because it is a proxy for the dollar.

The "dual market" approach may be the only viable solution that can operate without a price feed.  It is very challenging in deed.   

Given a price feed we can prioritize shorts very effectively by collateral.
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Offline tonyk

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Maybe the entire currency market should act as a single giant market maker bot.

This was supposed to be plan B.

Actually, I have suggested reasonable plan, with incentive for the willing bullish BTSX holders to fund such bot, if the need arises to go to plan B... But going there just because the peg does not hold at 100% with useless (with no practical use as of yet) bitUSD; using a client that nobody in his right mind will use for trading (or will remain in his right mind if he does use it for prolonged periods of time), is acting on emotions...
« Last Edit: September 18, 2014, 12:34:10 am by tonyk »
Lack of arbitrage is the problem, isn't it. And this 'should' solves it.

Offline GaltReport

So let's reason from first principals:

1) We want btsx to be valuable.
2) We want bitUSD to be worth $1.

Given these two desires, we need to create self reinforcing incentives that drive people towards both of those goals. If a minority of actors defect from those goals, they should be "punished" by losing value, whether they are holding bitAssets or btsx.

Some other truths:

1) the value of btsx relative to actual $ has been volatile
2) the value of bitUSD relative to actual $ has been volatile
3) bitUSD is (obviously) only priced in btsx.
4) we need shorts and longs in equal supply, because only when someone goes short can someone else go long and create bitUSD.
5) paying longs to hold bitUSD with transaction fees is good for them, and creates incentives for them to hold it.
6) forcing shorts to put up collateral btsx is good for them collectively, because it sequesters btsx and drives up the value of btsx. This enables shorts to make money.
  6a) forcing shorts to put up collateral btsx is bad for them individually, because buying btsx is hard and a short doesn't have an infinite supply of btsx.
  6b) Therefore, we have what in economics is called a collective action problem. The more shorts that short and the more collateral they put up, the better it is for them as a group, but each short wants to defect and let the OTHER shorts put up the collateral. Of course, since we demand a fix amount of collateral now by protocol, they can't defect. They can just choose to sit out.
7) If the peg isn't holding, it is because the short demand and the long demand are imbalanced. Therefore, we want to add longs when there are lots of shorts, and add shorts when there are lots of longs.

The obvious solution to pay the group that is insufficiently supplied. Any other solution will simply cause the smaller group to sit out. Since we are already tapping transaction fees to pay longs already, and they still seem to be in insufficient supply, where can we get more cash? They answer is from the group that is in larger supply. Just add a fee paid from shorts to longs (or longs to shorts, depending on the market). The fee should be something that is part of their bid.

Let the market decide the fees, and the peg will hold. No feed from delegates required.

Based on my limited understanding, this makes sense.  I'm guessing BM's proposal attempts to accomplish this in some similar way (that is harder for me to understand :) )
« Last Edit: September 18, 2014, 12:20:33 am by GaltReport »

Offline jsidhu

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So let's reason from first principals:

1) We want btsx to be valuable.
2) We want bitUSD to be worth $1.

Given these two desires, we need to create self reinforcing incentives that drive people towards both of those goals. If a minority of actors defect from those goals, they should be "punished" by losing value, whether they are holding bitAssets or btsx.

Some other truths:

1) the value of btsx relative to actual $ has been volatile
2) the value of bitUSD relative to actual $ has been volatile
3) bitUSD is (obviously) only priced in btsx.
4) we need shorts and longs in equal supply, because only when someone goes short can someone else go long and create bitUSD.
5) paying longs to hold bitUSD with transaction fees is good for them, and creates incentives for them to hold it.
6) forcing shorts to put up collateral btsx is good for them collectively, because it sequesters btsx and drives up the value of btsx. This enables shorts to make money.
  6a) forcing shorts to put up collateral btsx is bad for them individually, because buying btsx is hard and a short doesn't have an infinite supply of btsx.
  6b) Therefore, we have what in economics is called a collective action problem. The more shorts that short and the more collateral they put up, the better it is for them as a group, but each short wants to defect and let the OTHER shorts put up the collateral. Of course, since we demand a fix amount of collateral now by protocol, they can't defect. They can just choose to sit out.
7) If the peg isn't holding, it is because the short demand and the long demand are imbalanced. Therefore, we want to add longs when there are lots of shorts, and add shorts when there are lots of longs.

The obvious solution to pay the group that is insufficiently supplied. Any other solution will simply cause the smaller group to sit out. Since we are already tapping transaction fees to pay longs already, and they still seem to be in insufficient supply, where can we get more cash? They answer is from the group that is in larger supply. Just add a fee paid from shorts to longs (or longs to shorts, depending on the market). The fee should be something that is part of their bid.

Let the market decide the fees, and the peg will hold. No feed from delegates required.

That's what Ive already said. BM replied by saying delegates can pass around an interest rate. I would say to that that you can calculate interest rate based on the order (distance between the order price being executed and 1). If each node knows what the bid/asks are and they all have the same calculation why do you have to pass around an interest rate via delegates? YOu would only play FED if you manipulate the interest rate by pushing source that everyone has to accept? Kind of a force majeure, but still its up to the people to switch in that case...

I'm a fan of keeping it simple and this approach definitely is the most simply intuitive approach that I think would work. However maybe this problem needs a complex solution because it is a complex problem. Once we get more assets it gets more complex as we get different types of assets one day. Maybe in that case we need the IOU strategy he explained but it would need a ton of explaining so that new people wouldn't have to sit down with a napkin everytime to figure out how to trade in the ecosystem.
« Last Edit: September 18, 2014, 12:24:56 am by jsidhu »
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Ggozzo

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Maybe the entire currency market should act as a single giant market maker bot.

Offline theoretical

You people and your intent on pricing dollars in terms of BTSX rather than BTSX in terms of dollars!   

BTSX is like cash, and BitUSD is some weird derivative contract.  It makes more sense to say "a contract is worth 32 BTSX" than to say "a BTSX is worth 0.03125 contracts".  In addition, if your "price" is how many BitUSD one BTSX is worth, then "shorting" means betting that the price will rise!

So when you said "maximum" you really meant "minimum."  I have the following picture now (using BTSX as the price):

Bob wants to short 100 BitUSD at a price of 32 BTSX per BitUSD.  Bob must put up 3200 collateral minimum, as currently, but Bob can optionally put up more collateral.  Let's say Bob puts up 4000 BTSX.  Let's also say Carol shorted $100 at 32.15 with 3215 BTSX collateral and Dan shorted $100 at 32.50 with 5000 BTSX collateral.

As long as the feed is below 32, Alice can place a Bid order at 32 BTSX and be matched against Bob; Carol and Dan were outpriced.

But when the feed rises above 32, Bob's short moves up with it (instead of being cancelled as in the current paradigm).  It can only move up as long as price times quantity is less than or equal to Bob's collateral, though; so Bob's short won't execute above a price of 40 BTSX / BitUSD.

If the feed moves up to, say, 33, then Carol is out of the running due to insufficient collateral, and Bob and Dan's shorts are both at 33.  If Alice bids at 32, she can only be filled from Ask orders (until and unless the feed falls back to 32 or below).  If Alice bids 33, she'll be matched against Dan's order; Bob won't be able to get any buyers until Dan's order is filled (or the feed moves below 32.50 so Bob is again offering a better price than Dan).

Is this a fair summary of the proposed mechanics?
« Last Edit: September 17, 2014, 11:56:20 pm by drltc »
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Offline jonasmeyer

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So let's reason from first principals:

1) We want btsx to be valuable.
2) We want bitUSD to be worth $1.

Given these two desires, we need to create self reinforcing incentives that drive people towards both of those goals. If a minority of actors defect from those goals, they should be "punished" by losing value, whether they are holding bitAssets or btsx.

Some other truths:

1) the value of btsx relative to actual $ has been volatile
2) the value of bitUSD relative to actual $ has been volatile
3) bitUSD is (obviously) only priced in btsx.
4) we need shorts and longs in equal supply, because only when someone goes short can someone else go long and create bitUSD.
5) paying longs to hold bitUSD with transaction fees is good for them, and creates incentives for them to hold it.
6) forcing shorts to put up collateral btsx is good for them collectively, because it sequesters btsx and drives up the value of btsx. This enables shorts to make money.
  6a) forcing shorts to put up collateral btsx is bad for them individually, because buying btsx is hard and a short doesn't have an infinite supply of btsx.
  6b) Therefore, we have what in economics is called a collective action problem. The more shorts that short and the more collateral they put up, the better it is for them as a group, but each short wants to defect and let the OTHER shorts put up the collateral. Of course, since we demand a fix amount of collateral now by protocol, they can't defect. They can just choose to sit out.
7) If the peg isn't holding, it is because the short demand and the long demand are imbalanced. Therefore, we want to add longs when there are lots of shorts, and add shorts when there are lots of longs.

The obvious solution to pay the group that is insufficiently supplied. Any other solution will simply cause the smaller group to sit out. Since we are already tapping transaction fees to pay longs already, and they still seem to be in insufficient supply, where can we get more cash? They answer is from the group that is in larger supply. Just add a fee paid from shorts to longs (or longs to shorts, depending on the market). The fee should be something that is part of their bid.

Let the market decide the fees, and the peg will hold. No feed from delegates required.

Ggozzo

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You should limit the bitAsset trading to bitUSD. Limit BTSX exchange to the currencies. This will force people into buying bitU$D. It certainly would make the bitU$D market more liquid.

*This of course wouldn't be viable until there is more assets and more liquidity all around. Sort of a chicken or the egg scenario.
« Last Edit: September 17, 2014, 11:54:01 pm by skyscraperfarms »

Offline bytemaster

We have fixed price shorts... they only sell when the "feed is below their price" and can set what ever collateral ratio they want (greater than 2x). 

Blowing through the sell wall won't be a problem because at a certain price BitUSD demand goes away to.  "high BitUSD" is much less of a problem than "low BitUSD".

So how exactly do the feeds compete on collateral then?  Under your system, if there's a short at 32.00 offering 2x collateral and another short at 32.01 offering 10x collateral, and the feed is at 31.80, what happens?

My understanding was that both shorts would be forced to execute at 31.80, since the number (32.00 or 32.01) is a maximum price.  And then the 10x collateral would win (take priority).  Am I misunderstanding?
You people and your intent on pricing dollars in terms of BTSX rather than BTSX in terms of dollars!   

Assuming you are pricing things in BTSX...

All orders below the feed are sorted by collateral so in your case the 10x order at 32.01 is run first... if the feed moved to 32.001 then the 2x order at 32 is no longer in the running.

So you can place orders over a range... short at any price above 32, but don't short below 32.    Thus the "short wall" is the sum of all shorts willing to short below the current feed price.   Shorts can still place orders above the feed price and as the feed adjusts they will be there to support the market.

 
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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline bytemaster

A variable interest rate on shorts (potentially negative) would also drive a peg, but it would be a much slower process.    You could have the delegates publish an interest rate and then you would end up playing FED :) 

I am viewing this from an entirely new perspective:  BitUSD is a mechanism whereby those who wish to offer USD IOUs and profit from the redemption of those IOUs can compete with each other to offer the most collateralized USD.   They don't make any money if there is no churn. 

So if my "business" is issuing USD IOUs and I make money every time someone converts between my IOU and BTSX then I need to keep the spread competitive to make money.   This business goes up in value if more people are using its IOUs (BitUSD) and thus there is huge financial incentive to minimize the spread provided you can do so while taking on leverage in your own shares and without going long USD.

So the reason I know the peg will hold under the new rules is because I have already designed a trading bot that I can employ that will allow me to make money while enforcing the peg without going long USD or having to speculate on BTSX moving on a day to day basis.   The trading algorithm is relatively simple, supports spread of less than 1% and on average gives me increased exposure to BTSX with high collateral so I don't have to worry about margin calls.  The existence of the trading bot will in turn make BitUSD hold which will then drive BTSX up.


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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline gulu

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I cannot agree more with Vitalik that BitUSD will either be 1 or 0. To extend the theory, BitUSD20 will either be 1 or infinity, providing that 20% of interest is higher than most shorts willing to pay.

A market-adjusted interest rate is the best tool I can think of so far. The goal is to let the market determine the right interest rate in an unmanned way, meaning there needs feedback from the market. The feedback would better not be based on price feed. Let us think about what the market would do when the interest rate is too high. And let that characteristic be the feedback.

Thing is fear is always a stronger driver than greed (that is why the market always falls faster than it rises). So imagine if the incentive was even there, increasing as bitUSD fell. Confidence would also fall inline with an increase of interest rates (fees at which shorts have to pay increase)... thus we could have a case where people are "willing" to take a cut for an extended period of time because they beleive the system is broken and place a higher value in the system returning them any funds rather than a lucrative interest rate. If fees tend towards infinity as price tends towards 0, it will never get to 0. But it may stay away from 1 for a long time, and that it what will help people realize that the peg is here to stay and works. You need those incidences which make people have that fear and greed and we come out just fine... thats what drives market confidence up through the roof. Over time the spread will narrow and confidence rises, the black swans will happen but confidence curve will have higher lows every time, subsequently higher btsx prices. In fact you can probably draw a parallel between the decrease of spreads and the increase in btsx long term. They should be inverse of each other. Don't try to artificially fix what naturally should occur.

Im not sure about bitUSD above 1 and what incentive you can place to bring it back to 1, maybe long's pay fees to shorts?

Who would pay the fees to short on bitusd20? Why would someone use this and pay more when bitusd would have the liqudity they need?

Yes, the longs would pay to the shorts when interest rate is negative. The key here is that the rate needs to be floating and self-adjustable.
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